A Cheaper iPhone Could Send Thrifty Customers To T-Mobile Over AT&T

by Trefis Team
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Apple’s (NASDAQ:AAPL) iPhone launch could make matters really interesting in the wireless industry as a resurgent T-Mobile joins the other major wireless carriers in participating in the initial launch for the first time this year. After struggling for years, T-Mobile showed signs of turning the corner in Q2 2013 when it added 25% more postpaid net adds than AT&T (NYSE:T) during the quarter. The carrier’s aggressive marketing of its newly launched no-contract plans and the iPhone’s long-awaited debut in April seem to have infused it with a fresh lease on life. It remains to be seen if T-Mobile is able to sustain the initial momentum in the coming quarters. But should Apple launch a cheaper iPhone, it would make T-Mobile’s no-contract plans a lot more attractive and help it compete better with rival carriers. Considering AT&T’s dependence on the iPhone, it is likely to feel the most direct impact.

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Cheaper iPhone Could Boost T-Mobile

Under T-Mobile’s new no-contract plans, subscribers can either opt to pay for the phone in full or make an initial down payment and pay the rest in monthly instalments. While this means that the subscribers can switch carriers whenever they wish to, they are still liable to pay T-Mobile the device instalments for the remaining period. For the top-end smartphones that entail high instalments, that cost, together with the service fees, make T-Mobile’s plans almost as expensive as rivals’ postpaid contract plans. However, by separating the device costs from service fees, T-Mobile’s no-contract plans offer significant value for the low- and mid-end smartphones whose instalments are a lot lower. This is where a cheaper iPhone could bolster T-Mobile’s competitive standing in a saturated market afflicted by slowing subscriber growth.

Sure, bigger carriers like Verizon and AT&T have also launched similar no-contract plans. But these plans work out to be a lot costlier since their monthly service fees are same as that for their contract plans on top of which subscribers are liable to pay the phone instalments. For example, AT&T’s 1GB Mobile Share data plan with unlimited voice and messaging costs about $85 per month, irrespective of whether the customer signs up for a no-contract plan or not. In a no-contract plan, subscribers will have to fork out an additional $32.50 in monthly instalments for a high-end phone like the iPhone 5.

Value-wise, the gulf between T-Mobile’s no-contract plans and rivals’ contract plans is a lot narrower. But the potential launch of a cheaper iPhone could widen the gap and make T-Mobile’s new plans a lot more attractive for those at the low-end of the smartphone spectrum. While AT&T will collect the same fees as before despite offering lower upfront subsidies, a T-Mobile subscriber will pay lower instalments for the iPhone, thereby saving on overall costs. The value-add for subscribers will depend on how much Apple decides to sell the cheaper iPhone at.

Considering that the smartphone penetration in the U.S. is already past 50%, a significant opportunity still exists in transitioning the low-end of the subscriber base to smartphones. T-Mobile will be eying these subscribers in its latest turnaround attempt.

AT&T Needs To Shift Focus To The Low-end

AT&T, which has been the most reliant on the iPhone for postpaid net adds, is likely to feel the most impact. The iPhone accounted for almost 80% of AT&T’s smartphone activations last year. Despite the iPhone’s success, AT&T has been reporting dismal postpaid net adds recently, which led it to splurge on subsidies and promotions to attract subscribers last quarter. While the promotion drive was successful in drawing as many as 551,000 net postpaid customers in Q2, margins fell by 300 basis points over the same period last year. Moreover, T-Mobile’s launch of the iPhone saw it reverse eleven straight quarters of postpaid losses with 688,000 net adds in Q2 – 25% more than AT&T’s. With the wireless market already saturated, AT&T might find it increasingly tougher to add new postpaid subscribers should T-Mobile emerge as a stronger competitor with the cheaper iPhone.

However, T-Mobile is still way behind AT&T in terms of 4G LTE coverage, which is a big differentiator for carriers as data revenues surge. While AT&T has its LTE network in almost 400 markets across the U.S., T-Mobile has the smallest LTE coverage among the big four with coverage in all of 116 cities as of July. However, it is likely that both the carriers will have more or less the same LTE coverage by the end of 2014, so AT&T is unlikely to retain the LTE advantage for long.

Moreover, going after the low-end subscribers may not be very value-accretive in terms of ARPU growth. These subscribers are likely to consume less data and may therefore not be very valuable to AT&T. Still, with subscriber growth slowing, transitioning low-end subscribers to smartphones seems like the best growth strategy going forward. Data consumption is likely to grow even at the low-end as 4G LTE becomes more prevalent and smartphones incentivize users to perform more data-intensive tasks.

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